Financial Management of Major Catastrophes: Who Pays?

15 April 2011

Address to the CEDA Conference
15 April 2011

'The Iceman Cometh' wrote Eugene O'Neill back in 1939.

One stands here 71 years later wondering a little whether the American Nobel laureate was giving some sort of prescient warning of the Aussie summer we've just had.

O'Neill's classic play of course didn't in practice deal with raging rivers and flooding waters - and in large part alludes to anarchy, and society's attempts to deal with it.

But events that seem like natural anarchy come to this wide brown land from time to time; and we do our best as a society to deal with it and hope for a better tomorrow.

And some ice-hearted creature riding rude and wicked skies certainly came to us in January and so now we await, hopefully for a weather god of a very different disposition, in the early autumn sun.

Knowing Melbourne's capricious climate well, as I do, perhaps we shouldn't be too optimistic. Although O'Neill did also write in '39:
"The lie of a pipe dream is what gives life to the whole misbegotten mad lot of us, drunk or sober."

Anyway, we'll see.

Waiting for winter in Melbourne (or Brisbane) this year has got much less than usual to do with the football.

The season we've just gone though sure aint been a good one.

Cyclones, storms, floods, fires - and of course for our friends in New Zealand and Japan – horrific earthquake and tsunami.

Disasters that ruined lives in distinct neighbourhoods, the lives and happiness of thousands of Australians – these have still also obviously had real negative repercussions for us all.

The Gillard Government remains today as determined as we were when the mud was still wet and smelly to not just come to terms with the financial effects of these wretched events, but the real emotional effect on individuals and families.

I have seen those effects first hand in a series of visits to Queensland and elsewhere over the last few months.

Indeed back in early February, when we were debating the condolence motion, I said that while the Australian Parliament is a big strong building one of the most obvious things that we can't help but recognize is that clearly Parliament and politicians often just can't have the answers - far from it.

And instead on matters like the summer floods all we are left with is a requiem of questions: will people be okay? Did families get to safety? How soon will these storms and floods come again? How long will it take to rebuild? Could we have avoided the worst of it?

But I suppose as the weeks go by and as the torment and sadness of what happened subsides a little, it's a very good thing to turn the sharp collective mind of the country at large (not just the Parliament) to focus on getting some answers, at least by starting to properly ask the tough questions.

So I think it's right and proper that we begin to ask who should bear the financial burden of major catastrophes – and I commend CEDA on, once again, putting together an important line up of contributors to the discussion this week.

I simply start my contribution by saying that when the question is asked of who pays – the proper human answer is of course: those who lost their loved ones.

And the great heart wrench of it all is that nothing can replace a life lost.

Losing your house or other worldly possessions is one thing, but losing your son or daughter is another. That is the ultimate price of catastrophe.

But I am intensely determined to do what I can to help our citizens recover from this series of disasters and to ensure that we, as a community, put in place the right public policy framework for maximising recovery and resilience in relation to any future events like these.

The first of the Gillard Government's priorities has been to help people in affected areas to rebuild and get on with life as they lived and loved it. And to have adequate resources to provide for themselves and their families during this journey of recovery.

I learnt from my time as Parliamentary Secretary for Victorian Bushfire Reconstruction that recovery is indeed a journey and there are many frustrating and emotionally draining ups and downs on the way.

Much of the Gillard Government's floods assistance has been delivered through the long-standing Natural Disaster Relief and Recovery Arrangements.

These arrangements allow each State to determine the type and level of assistance they provide, while the Commonwealth assists by sharing the significant and unexpected financial burden caused by large disasters.

The arrangements support the timely implementation of a sensible set of recovery actions, while allowing for extra assistance in exceptional circumstances.

The National Disaster Relief and Recovery Arrangements govern much of the public sector response to natural disaster recovery. They meet some immediate needs, such as grants to minimise personal hardship, but the main focus is on longer term recovery – the restoration of roads, bridges and public buildings; recovery grants for businesses, farmers and not-for-profits; and packages to help communities get back on their feet.

And as a major source of government assistance, it is important that the Relief and Recovery Arrangements do not distort insurance markets, which continue to operate alongside it.

Similarly, communities and individuals should not be discouraged from what we might call resilience-building or mitigation activities.

Accordingly, a key principle of the Relief and Recovery Arrangements is that assistance should not supplant or act as a disincentive to self-help – including through insurance.

The Government has strengthened the Relief and Recovery Arrangements in line with this important principle, by requiring that the States have their arrangements for meeting the costs of disasters regularly assessed by an independent specialist. This will ensure each State has cost-effective insurance arrangements in place.

These cost-effective arrangements might take the form of commercial insurance and reinsurance, or other mechanisms such as self insurance.

The important point is that states and territories have a responsibility to ensure their arrangements are suitable for their circumstances and represent the best value for all taxpayers.

The strengthened Relief and Recovery Arrangements will help deliver this outcome.

The cost of Commonwealth assistance has been substantial. The cost to the Australian Government in flood-affected regions alone has been estimated to be $5.6 billion, which is predominantly the cost of rebuilding public infrastructure.

While no one likes paying extra taxes, the temporary flood and cyclone reconstruction levy is the best way to maintain essential services and ensure that the cost of the rebuilding effort is shared equitably. And it's endorsement by the Federal Parliament, including the independent cross benchers, is testament to how the levy was a sensible, balance way to go.

In addition to the Government contribution, funded both via budget cuts and the levy, many Australians have donated to charities supported flood victims.

More than $200 million has been raised in charitable donations, a fact which speaks volumes about the generosity of ordinary Australians and the Australian spirit of helping out your friends.

These funds held by charities will help individuals and families affected directly and personally by the floods to rebuild their lives, rebuild their homes and indeed replace some of their possessions.

An additional way in which we can work toward fairness in the sharing of risks and costs associated with natural disasters is to maximise the take up of insurance.

I have mentioned the strengthening of the Relief and Recovery Arrangements with the object of ensuring that states have cost effective insurance arrangements in place. But the take up of insurance by individuals and businesses too, should be maximised.

We have seen that, in many cases, especially in relation to floods, individuals have not, for one reason or another, found themselves with adequate insurance to cover loss and damage, and so have had to bear the cost themselves.

In these instances the risk and cost is not distributed widely, but borne by individuals and families alone.

It was against that background that I commenced intense consultation with flood victims, consumer groups, the insurance industry, and other stakeholders in a process of consultative engagement in the aftermath of the floods.

That consultative process has made clear to me that there are two broad sets of issues relating to the insurance of natural disaster risk:

  • Firstly, there are the issues that can't wait – those that demand immediate action to ensure that people have a clear understanding of what their insurance policies do and do not cover, so that there are no unpleasant surprises in the event of another flood.

  • Secondly, there are a broader set of policy issues that need detailed and careful analysis to ensure that the Australian Government has the very best policy settings in place for fairness in the sharing of risks and costs associated with flood and other natural disasters.

In relation to the first set of issues – those that can't wait – we have acted quickly, but also carefully and intelligently. Two of the key issues that the Government judged to warrant immediate action were:

  • That some insurance policies exclude cover for some types of events, for example, river flood; and

  • That policyholders have not always been fully aware of the extent of their cover and the types of events that are not covered.

On 5 April, I released the Consultation Paper – Reforming Flood Insurance: Clearing the Waters.

The thinking behind the key proposals in the paper is simple. If you have an insurance policy, you should be able to tell, at a glance, what that insurance policy covers you for.

The paper has two proposals:

  1. A standard definition of flood for inclusion in insurance policies

  2. A short 'key facts' statement that summarises the contents of insurance policies.

The intention is that there will be no confusion about the meaning of the term 'flood'. You'll either be covered for flood or not. If your policy says you will be covered for 'flood', then insurers won't be able to exclude 'river flood', for example.

The standard definition has been designed by the Government, in close consultation with the Insurance Council of Australia and consumer groups.

The purpose of the single page key facts statement is to allow consumers to see at a glance, the key elements of the policy – what is covered and what is not. This will help in the understanding of what policies cover and allow people to shop around much more easily.

Those proposals will be subject to public consultation so the details can be refined. It is expected they will be considered for inclusion in legislative changes introduced later this year.

The paper containing the proposals that I released last week also referred to other initiatives that had been developed in consultation with consumers and industry groups, including:

  • flood mapping

  • a limit on the time for claims handling; and

  • a Centrepay facility for payment of insurance premiums.

The issue of flood mapping is a very important one in the context of the broader debate on dealing with natural disasters.

In order to develop the most appropriate and effective community strategies to deal with the risk of natural disasters, it is essential that we have adequate sources of data on which Governments, business and individuals can make assessments of the risk of natural disasters, and judgments about how best to mitigate those risks.

These assessments and judgments can be taken into account when making decisions about land use and development, for example, matters that should be looked at carefully in this context.

In relation to flood, and to the question of insurance for flood, it has become clear that flood risk mapping data is crucial for the accurate pricing of insurance products.

Insurers have made clear to me, in my discussions with them, that improved access to data of this kind could be used by them to better assess risk and possibly increase the range of flood risk products they offer.

Lack of available flood risk data is a reason cited by the industry for a lesser number of policies offering cover for flood in Queensland than in states like New South Wales – a fact noted by Mike Wilkins, CEO of IAG, in his presentation to CEDA earlier this week.

Because of the importance of reliable flood risk data in the context of managing risk, COAG has tasked the National Emergency Management Committee to scope a potential work program to map areas of risk relating to all of the main types of flood and inundation. This work is being progressed by my colleague the Attorney General and his Department.

We have also invited the Insurance Council of Australia to play a key role in the Government's work on flood mapping, and the ICA has agreed to play a role in that process.

In a number of other countries, the UK for example, the private sector has borne a large part, and in some instances all, of the cost associated with flood mapping and this has assisted in improving coverage.

So I do want to see private sector stump up for some of the costs of substantially improved flood mapping in Australia – especially considering how much the insurance industry wants to see that better flood mapping data.

The Government has also moved to make it easier for people in receipt of Commonwealth benefits to pay their insurance premiums, opening the way for payments to be made through Centrelink's Centrepay system to insurers who want to participate.

In addition, the Parliamentary Secretary to the Treasurer has had some constructive discussions with industry and consumer representatives in relation to options for dealing with unfair terms in insurance contracts.

I am very pleased with the positive and collaborative engagement with the Government and consumer advocate groups on reform proposals following the recent disasters. And I particularly welcome the industry leadership that has been shown by the Insurance Council of Australia in those discussions.

In light of the range of reforms currently being considered and progressed, and to build on the momentum we now have toward constructive engagement, today I want to take the next logical step.

In terms of those broader issues I mentioned earlier many of you here today would be aware that I announced this Review on 4 March.

The Review is chaired by John Trowbridge, with John Berrill and Jim Minto as members.

It is currently considering how best to achieve objectives relating to the equitable sharing of risk and cost resulting from floods and other natural disasters.

It has a broad remit to examine the arrangements for the insurance of assets of individuals, small businesses and governments.

It is also examining whether any further measures are needed to promote consumer awareness and understanding of the scope and coverage of available insurance products.

The Review's terms of reference also cover claims management, dispute resolution and consumer assistance and advocacy services.

The review will report to me by 30 September 2011. And it will also report to the Attorney-General as Chair of MCPEM-EM for consideration in the context of the National Strategy for Disaster Resilience.

In drawing up the terms of reference for the review, the Government was mindful of a general policy that I think it's fair to say has been adopted by successive Australian Governments in recent times; that where commercial markets, including insurance markets, operate efficiently and effectively on their own, the Government should be reluctant to intervene.

This is why we have made clear, in the terms of reference, that the Review should be guided by the principle that Government intervention in private insurance markets is justifiable only where, and to the extent that there is clear failure by those private markets to offer appropriate cover at affordable premiums.

There are those who have called for Government intervention in the insurance market as a solution to the lack of adequate insurance for flood.

In 2003 the Howard Government introduced the Terrorism Insurance Act, which provided for a scheme for insuring commercial properties against terrorism risk.

Insurers were effectively prohibited from excluding cover for such risk, and were able to reinsure their risk with the Australian Reinsurance Pool Corporation.

That scheme was supported, following some amendments, by the opposition, and has been continued in operation by the Labor Government.

I pause here to acknowledge the presence amongst us of Neil Weekes, who served with distinction as CEO of the Australian Reinsurance Pool Corporation until his recent retirement, and will also address you today.

It should be made clear, however, that the Terrorism Insurance Scheme was implemented only after a careful analysis of the market revealed very substantial problems with availability and affordability of terrorism cover.

As the then Treasurer, Peter Costello, noted in outlining the scheme to Parliament:
"In Australia, there is virtually no traditional terrorism risk insurance available for commercial properties and infrastructure. What limited cover is available is generally regarded as too expensive by the market, and remains unsold."

Peter Costello also told Parliament that the scheme was intended to be in place only until the re-emergence of a commercial insurance market in this area, at which time the scheme would be wound down and the Government would withdraw from the market.

Whether a scheme such as the Terrorism Insurance Scheme is appropriate for addressing issues of affordability and availability in the market for natural disaster insurance is a question that will be considered by the Natural Disaster Insurance Review, and I should certainly not be taken to be ruling out such a response.

However, in assessing this question the Review will be guided by the principle I have outlined - that Government intervention in private insurance markets is justifiable only where there is clear failure by those private markets to offer appropriate cover at affordable premiums.

I think what I've said indicates that the issues surrounding the financial management of natural disasters, or other major catastrophes to adopt the terminology of this conference, are many in number and complex in nature.

I look forward to hearing the views on these issues that will emerge during this very worthwhile and timely discussion.

Thank you.

15 April 2011